Explaining Greenium in a Macro-Finance Integrated Assessment Model

76 Pages Posted: 28 May 2021 Last revised: 2 Oct 2023

See all articles by Biao Yang

Biao Yang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: May 27, 2021

Abstract

How do firms' environmental performances affect cross-sectional expected stock returns? Using a third-party ESG score, I find that greener stocks have lower expected returns. This greenium remains significant after controlling for systematic and idiosyncratic risks. Green stocks hedge climate-related disasters, contributing to the greenium. A macro-finance integrated assessment model featuring time-varying climate damage intensity, recursive preferences, and investment frictions quantitatively explains the empirical findings. The model implies a positive covariance between climate damages and consumption, which justifies a high discount rate and a low present value of carbon emission.

Keywords: Climate finance, macro-finance, asset pricing

JEL Classification: G12, Q43, Q5

Suggested Citation

Yang, Biao, Explaining Greenium in a Macro-Finance Integrated Assessment Model (May 27, 2021). Available at SSRN: https://ssrn.com/abstract=3854432 or http://dx.doi.org/10.2139/ssrn.3854432

Biao Yang (Contact Author)

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

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